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This article is based on the white paper “Moving Up in a Downturn, Management challenges and strategies for municipalities,” commissioned by the League’s Educational Foundation. It is part of the Friends of Local Government Series. For the complete paper, go to www.njlmef.org/events.html.

By Dorothy Olshfski, Director and Angie McGuire, Assistant Professor, Center for Executive Leadership in Government at Rutgers University.

The magnitude of the present economic downturn affects every township, borough, and city in New Jersey. The dramatic impact of this recession has forced municipal officials to question their role in the life of their communities. What goods and services ought government to be responsible for? And how ought the cost of community services be apportioned?

In a series of 12 focus groups hosted by Rutgers University Center for Executive Leadership in Government (CELG) between April 2009 and May 2010, mayors and business managers of medium size cities in New Jersey explored their options in keeping their towns viable.

The State of the State For New Jersey municipalities, fiscal year 2011 is likely to present the worst financial environment since the Great Depression. Public opposition to tax hikes, already at an all time high, is increasing in intensity. Concomitantly, the state’s structural debt and underfunded obligations combine with constrained tax revenues to demand budget reductions. In a cascade effect, the resulting state spending cuts in municipal and school aid create additional revenue pressure at the municipal level. Not only are tax revenues and state aid decreased in this fiscal year, municipalities also face the imposition of a new 2 percent property tax levy cap on remaining property tax revenue sources. Further, many contractual obligations and expenses exceed the legislatively imposed tax levy caps to create a perfect storm of revenue decreases.

Not all New Jersey municipalities are in the same situation. Some have fared better than others, but all the focus group participants were cutting back. In our conversations they discussed two categories of coping strategies. The first line of defense is the traditional set of tools, rewind and replay tactics that keep the present alignments in place—just smaller. And the fall back position that attempts to change the mix of what is delivered, who delivers it and who pays for it.

Traditional Cost Cutting In the third year of recession, all mayors and business managers report that they have employed traditional cost cutting strategies to the point of diminishing returns. The local officials used line item reductions, across the board program cuts and service contract revisions in the first and second years of the recession to deal with lower revenues. The traditional tools used by all administrators and politicians looked the same, and fall into three major categories (Table 1).

Eliminate Waste and Abuse This strategy for cost reduction is exhausted after three years of recessionary cuts. Redundancy is gone. Assistant business administrator positions are gone. Much of what served as a check on administration, or a training ground for new administrators has been eliminated.

Personnel Cuts Personnel is the single biggest line item in all of the participants’ budgets and, beginning in Fiscal 2009, personnel cuts topped the list of actions taken to reduce costs. All municipalities reported considering one or more of these four strategies for cutting personnel.

Furloughs are a popular short term tool to reduce, not eliminate, costs. But furloughs delay grappling with the bigger issue of program cutbacks. And furloughs burden employees by reducing income, without reducing workload.

Lay-offs are used by about half of the participating municipalities. Some of these layoffs were the result of outsourcing. Most reported that the negative impact on morale outweigh the small cost savings. Many reported labor contract restrictions.

Retirements are increasing. Fearful of pension fund changes, more public service employees are retiring earlier. The impact is the acceleration of pension obligations, and the loss of institutional memory.

Attrition management is used in every municipality. By not back-filling positions after retirements and attrition, municipalities reduce headcount without layoffs. Part-time employees then fill the jobs at a lower cost.

Delaying Capital Expenditures Delaying big projects is a step taken by most municipalities. Participants alluded to the increased future cost of deferred maintenance on infrastructure, but with few exceptions, most municipalities made the cuts anyway.

Economic Development In an effort to enhance the tax base some municipalities have focused on economic development. Those municipalities who successfully recruited commercial and retail business during boom years have some relief from solely relying on property tax. However, for those towns in the midst of redevelopment efforts, projects have stalled as access to capital has been constrained by the recession.

But by Fiscal 2011, mayors and business managers caution that the traditional tools of cost savings have become unsustainable and counterproductive. Loss of employees, stressed remaining employees, loss of institutional knowledge, lost practical experience and deteriorating infrastructure have begun to negatively impact the communities.

Redesigning Cost Cutting The ‘reset’ strategies kick in after the traditional modes of cost cutting are exhausted. These strategies are geared toward changing the relationship between the community and their government. The proposed cost saving arrangements may change who is delivering the service, who pays for it, or the rules about spending and taxing. (Table 2)

Consolidation Since forever, New Jersey officials and citizens have been discussing consolidating towns, but, as our history and our focus group participants say, it just is not going to happen. Regardless of promised cost savings, the participants rejected it anyway. New Jersey residents, for a multitude of reasons, oppose consolidation.

Shared Services All of the focus group participants reported some strategy for sharing services among adjacent municipalities. Two counties governments have begun to deliver services previously delivered by cities and towns, which has reduced the cost to the municipalities. Reportedly, success of shared service strategy depends upon the costs structures of the jurisdictions.

The Legislative Tool Kit The Legislature holds statutory control over all taxation in the state and sets limits on taxes at all levels of government. The newly imposed 2 percent cap on property taxes exacerbates the revenue shortfalls at the local level. While the property tax cap exempts cost increases in health care, pensions and debt service, contractual obligations are not exempted. Between state spending mandates, and contractual obligations for uniformed officers and represented workers, municipal costs are increasing far greater than the 2 percent cap. Expense reduction is not enough.

Unfunded mandates are a source of extreme financial pressure. The mandates transfer the burden and cost– without money to cover the associated costs. And because these services are mandated, they are not on the bargaining table when cuts need to be made.

The legislative tool kit, an amalgamation of policy reforms, is being assembled now but the municipal officials have doubts about what will make it through the Legislature and what good it will do if passed. They point out
that these reforms will not provide any short term relief to budgets. Although the tool kit reforms are welcomed by municipalities, they are not a solution for this crisis. They are long term efficiencies.

New Revenue Sources The creation of new revenue sources translates into new or different citizens contributing to the municipal coffers. Fee for service arrangements might find citizens paying for services that previously were taxpayer supported. Most of the focus group participants grappled with decisions about what services ought to be user supported and what ones ought to be government’s responsibility. Other mayors suggested allowing local entertainment and dining taxes so municipalities can benefit from downtown revitalization projects.

The Process of Coping New Jersey municipalities are between the proverbial rock and a hard place. Local officials are dependent upon property taxes for revenue. They have no alternative authority to raise revenues beyond the tax levy cap. At the same time, the municipal contractual and statutory expenses are growing faster than the revenue. The state holds the authority to impose service delivery standards and regulations on the municipalities, and has done so while capping the absolute funding available to meet those service delivery requirements.

The state has been reticent to consider any rules that grant local governments more freedom and flexibility from state rules. The mayors and business managers feel they are carrying the burden of making the really hard decisions. The participants did not see the state as a partner; rather, in many cases the state is seen as an adversary. The mayors and business managers attending these focus groups spoke with great frustration and concern about the state’s rules that severely limited their options. Further, many officials decried the perceived lack of confidence the state displayed in the municipal officials and they riled at the lack of communication that they see as characterizing the state behavior toward the municipalities.

There was a consistent theme running through the focus groups that the public and the state governments are in denial about the magnitude of the problems facing municipalities. And citizens’ service expectations are disconnected relative to the resources available. The budgets may close this year, but there are unattended structural gaps emerging that can overrun the municipalities. Municipalities are being pushed into the ‘reset’ mode of governing where we will see a realigning of the costs and benefits of local governments. Without exception, the local leaders envisioned a different landscape for local governments in the future. s

The Center for Executive Leadership in Government would like to acknowledge New Jersey League of Municipalities Educational
Foundation, particularly Michael Cerra and Louise Wilson, for the support of the study Moving up in a Downturn: Management Strategies for Governing in a Recession. The CELG would also like to thank the mayors and municipal managers who shared their experiences and providing information about the skills required of appointed and elected officials in the new fiscal world. Kathe Callahan, Dennis Ng, and Alan Zalkind provided significant contributions to this project. Leila Sadeghi provided support in conducting the focus groups. The CELG gratefully acknowledges funding for this research provided by New Jersey Natural Gas.